Sorting system woes box UK Mail into a corner

Additional operating costs have delayed the full benefits expected of automation

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UK Mail is blaming the wrong kind of parcels for its latest profits warning: specifically too many odd-shaped packages. Its shares fell more than 14 per cent.

The rival to Royal Mail has moved its main sorting operation from Birmingham to a new fully-automated hub in Ryton, near Coventry. But the company has admitted that a fifth of parcels do not fit the new system.

“A greater than anticipated proportion of current parcel volumes is incompatible with UK Mail’s new automated sortation equipment, resulting in additional operating costs and therefore a delay to the full benefits expected from automation,” the company said.

Many of the odd-shaped parcels are understood to have been those inherited from City Link customers, after that parcel business went bust at the start of the year. UK Mail also blamed too many City Link customers for a profits warning in April.

UK Mail has also seen greater churn among its customer base, due to the disruption caused by the relocation.

The delivery company is now saying that profits will be in the region of £10m to £12m this year, compared with expectations of  £20m. The shares fell 75p to 455p.

The impact of the problem is likely to spread into 2016 as well, UK Mail said.

In contrast, the company’s mail business is doing well, with volumes up 6 per cent during the four months since April. The group unveiled plans to invest £20m in new sorting equipment at its new hub in Coventry and it is looking eventually to increase the amount of mail sorted automatically from 20 per cent to 80 per cent.

Guy Boswell, the chief executive, insisted yesterday that many new customers wanted to use the delivery company because of its new Coventry facilities and said the medium to long-term outlook for the business remained strong.

“The completion of our new fully-automated hub represents the largest strategic development in our corporate history and the rationale for the significant investment remains compelling,” Mr Boswell said.

The move to automation is expected eventually to help cut costs by reducing manual labour and letting more parcels be packed into the same delivery van.

Analysts at Investec yesterday downgraded their rating on UK Mail to Add from Buy and cut  the target price on the shares by 9 per cent to 485p. However, they added that  they believed the impact would be “relatively temporary”, expecting an improvement in performance for the year ending March 2017.